The inability of the Bayesian model to accommodate Ellsberg-type behavior is well-known. This paper focuses on another limitation of the Bayesian model, specific to a dynamic setting, namely the inability to permit a distinction between experiments that are identical and those that are only indistinguishable. It is shown that such a distinction is afforded by recursive multiple-priors utility. ...

This paper axiomatizes an intertemporal version of multiple-priors utility. A central axiom is dynamic consistency, which leads to a recursive structure for utility, to ‘rectangular’ sets of priors and to prior-by-prior Bayesian updating as the updating rule for such sets of priors. It is argued that dynamic consistency is intuitive in a wide range of situations and that the model is consistent...

Individuals often tend to conform to the choices of others in group decisions, compared to choices made in isolation, giving rise to phenomena such as group polarization and the bandwagon effect. We show that this behavior — which we term the consensus effect — is equivalent to a well-known violation of expected utility, namely strict quasi-convexity of preferences, which is shared by many popu...

The class of maximin actions in general decision problems is characterized. JEL classification: C70, D81.

This note provides a behavioral characterization of mutually absolutely continuous multiple priors. JEL classification: D81

We generalize the classical expected-utility criterion by weakening transitivity to the conjunction of transitive indifference and Suzumura consistency. In the absence of full transitivity, completeness no longer follows as a consequence of the system of axioms employed and a richer class of rankings of probability distributions results. This class is characterized by means of standard expected...

We use the revealed preference method to derive a model of individual decision making when one’s endowment provides a reference point that may influence her choices. This model generalizes the classical rational choice model. While the latter views choice as a consequence of “utility maximization,” the model proposed here views choice as arising from “mentally constrained utility maximization,”...

This paper explores a general model of the evolution and adaption of hedonic utility. It is shown that optimal utility will be increasing strongly in regions where choices have to be made often and decision mistakes have a severe impact on fitness. Several applications are suggested. In the context of intertemporal preferences, the model offers an evolutionary explanation for the existence of c...

A common precept of decision analysis under uncertainty is the choice of an action which maximizes the expected value of a utility function. Savage’s (1954) axioms for subjective expected utility provide a normative foundation for this principle of choice. This paper shows that the same set of axioms implies that one should select an action which maximizes the probability of meeting an uncertai...

This paper proves that, in a general financial model with incomplete markets, the multiplicity of certainty equilibria is not necessary for the existence of sunspot effects. These effects are present, by definition, when real economic variables differ across realizations of extrinsic uncertainty. In a financial model of incomplete markets with identical payouts across realizations of extrinsic ...